EU sets deadline to resolve debt crisis

European Union leaders have given themselves a deadline of two weeks to agree a deal to tackle the eurozone debt crisis, a grand bargain senior officials said would include a final decision on Greece’s bail-out and a strategy to recapitalise the region’s banks.

Herman Van Rompuy, the European Council president, said EU leaders would meet Oct. 23 to “finalize our comprehensive strategy,” allowing them to present a plan at the G20 summit on Nov. 3-4.

The eurozone has come under pressure from Washington and London to get to grips with its sovereign debt crisis by early next month or risk plunging the global economy into turmoil.

Greece remains the most contentious issue, according to European officials, with a German-led group of creditor countries pushing to revise the second €109bn ($149bn) Greek bail-out to include deeper “haircuts” for Greek bondholders – a plan resisted by France and others worried it could spread panic through the financial system.

Both sides have agreed to wait for a detailed report from the so-called “troika” of international lenders to Greece before deciding how to proceed, officials said. Troika negotiators are expected to wrap up their talks in Athens today, but a complete evaluation of Greek finances is unlikely to be finalized until the middle of next week, forcing EU leaders to delay Monday’s planned summit until Oct. 23.

Despite the remaining hurdles, the euro saw its biggest one-day gain against the dollar in more than a year as hopes rose that policymakers had committed themselves to tackling the crisis. The euro rose more than 2 per cent against the dollar, while the FTSE Eurofirst 300 rose 1.6 per cent.

However, there were further signs of strain in bank funding markets. Three-month euribor rates, the traditional gauge of unsecured interbank lending in euros, inched higher, suggesting worries over the health of banks was still preventing institutions from lending to each other.

Just hours after France and Belgium agreed to break up Dexia, whose inability to raise short-term funding brought it close to collapse, Austria’s Erste announced it had fallen victim to the recent turbulence. The Austrian banking group said it would lose as much as €800m this year and write down €180m in eurozone sovereign debt.

Senior European officials insisted they were close to a bank recapitalization plan after Paris softened its demand any Europe-wide strategy be run through the eurozone’s €440bn rescue fund.